Do Mutual Funds Have An Exit Load?

4 mins read

A mutual fund is a separate entity that pools investment funds from various interested parties and invests them into a diversified set of assets. This pool of investment is professionally managed by the fund manager so that you don’t have to worry about reconstituting your portfolio in case of market changes.

Mutual funds charge specific fees for managing your investments as a company. This charge is referred to as a load.

When mutual fund charges would be levied would depend on when the AMCs assess the fees.

What is an exit load in a mutual fund?

An exit load is a penalty charged to the investor at the time of retrieving or exiting an investment. The primary aim of levying an exit load is to discourage investors from retrieving their funds from an investment before the lock-in period.

A mutual fund manager determines an average investment term suitable for your risk tolerance based on the return you wish to receive. Thus, if you withdraw your funds before that, the equation of risk-return changes for other existing investors. In order to be fair to the existing investors, the fund charges an exit load as a penalty.

An exit load is imposed on investors to keep them from withdrawing their funds during the specified lock-in period.

However, it is crucial to remember that only some schemes have an exit load applicable to them. Thus, you should read through your scheme documents carefully before investing.

How is exit load calculated?

The exit fee in a mutual fund is charged as a percentage of the Net Asset Value (NAV) at the time of redemption of the mutual fund units. NAV is the net value of all assets minus the liabilities of the company.

The exit load is reduced from the NAV before crediting the proceeds to the investors. The fund managers usually decide the percentage at which exit load must be deducted.

Let us illustrate this with an example:

Assume Mr A has invested INR 8,000 in a mutual fund scheme B in Nov ’21. The NAV of the scheme is INR 100 and the exit load on redemptions within one year is 1%.

Additionally, in Jan ’22, Mr A invested INR 5,000 in the same fund with a NAV of INR 100.

How will you calculate the exit fee for redeeming the fund in Sep ’22, when the NAV is INR 120?

What is the exit fee for redemption in Dec ’22 when the NAV is INR 125?

Step 1: Calculate the units purchased

Number of Units bought in Nov’21 Rs. 8,000/100 = 80 (Total NAV/Number of Units bought)
Number of units bought in Jan’22 Rs. 5000/100 = 50

For redemption in Sep ’22, the exit load would be charged for both investments in Nov ’21 and Jan ’22 as per the prevailing NAV of INR 120 in September.

Exit Load 1% of [(80 +50) x 120] = Rs 156.
The amount credited to the investor 15600 – 156 = 15444 (Total NAV – Exit fee)

Step 2: Determine exit load and final distribution to investor

In case of redemption in Dec ’22, the first investment of Nov ’21 crosses the lock-in period of 1 year. It, therefore, does not incur an exit load upon redemption.

However, the second investment in Jan ’22 will incur an exit charge of 1%, as indicated below.

Exit Load 1% of [50 x 120] = Rs 60.
The amount credited to the investor 6000 – 60 = 5940 (Total NAV – Exit fee)

To conclude,

The purpose of mutual fund exit loads, where applicable, is to discourage early redemptions in order to protect investors’ interests. When investing in a mutual fund, you should always check the mutual fund exit load or mutual fund fees.

Exit load periods are not always one year as commonly assumed. If you read the information documents, you will be able to understand exit loads, which will help you make wise decisions.